Raise a glass to these 3 bulletproof booze players

Commentary: Your portfolio could use a taste of these three

Rockville, Md. (MarketWatch) — After a roaring start to the year on Wall Street, it’s been quite a rocky market in the second quarter. The market is down a bit since March 31, and investors who have enjoyed front-loaded returns in 2013 are now on the defensive.

Want proof? Consider that the Consumer Staples Select Sector SPDR ETF
XLP, -0.93%
is up more than 4% in the last 30 days vs. an S&P that is slightly in the red.

It makes sense that investors are moving into lower-risk sectors as gold melts down, blue chips continue to struggle with their top line and seasonality threatens to throw a bucket of cold water on the rally. And one of the most attractive segments of the staples market to move into now — both for stability and for long-term growth — is the alcoholic beverages business.

Here’s why booze stocks are so bulletproof.

Baseline demand: In tough times, “sin stocks” peddling beer and spirits do very well. After all, if you can’t afford a tropical vacation, the least you can do is pour yourself a drink to unwind.

Brand power: An entrenched alcohol brand — particularly in the spirits space — is difficult to unseat, both because of customer loyalty and due to the continued consolidation in the space via mergers and acquisitions.

Emerging markets: As a growing middle class in Latin America and Asia develops a taste for Western products, beer and whiskey sales continue to see nice growth in these regions. Consider that Irish whiskey sales volume jumped 22.5% last year thanks to emerging-market demand.

If you want to get a little defensive with your portfolio but still have the potential for growth, beer and spirits stocks area good option right now. Three in particular that I like are mega-brewer Anheuser-Busch InBev
BUD, -1.33%
spirits giant Diageo
DEO, -2.19%
and mid-cap whiskey giant Beam Inc.
US:BEAM
.

Anheuser-Busch InBev

Mega-brewer Anheuser-Busch InBev is not just a stable staples stock; it is one of the biggest and most entrenched companies in the world. BUD is a $150 billion company — larger than retail giant Amazon.com
AMZN, -0.66%
or oil powerhouse BP
BP, -1.83%
measured by market capitalization. It does about $40 billion in annual revenue across more than 130 countries, and it’s the largest brewer in the world by several metrics.

In fact, it’s so huge that its proposed buyout of emerging-market beer stock Grupo Modelo (GPMCF) ran into trouble earlier this year because of antitrust concerns, and BUD will have to divest the entire U.S. arm of Modelo to appease regulators. That should tell you everything you need to know about how dominant this beer stock is … and how aggressive it’s willing to get to pursue emerging-market growth. Modelo’s market share in Mexico is over 60%, and BUD is willing to buy the whole enchilada and divest U.S. operations just to get in on this fast-growing marketplace.

AB Inbev is flying high on projections of roughly 10% revenue growth in fiscal 2013 over last year. Thanks to this improvement coupled with optimism over the Modelo buyout, the stock is up 36% in the last year to lap the S&P 500 about three times.

But don’t think the acquisition pop will be short-lived. Longer term, Anheuser-Busch InBev has doubled since January 2010, while the S&P is up about 40% — thanks in part to efficiencies and continued growth after the blockbuster $52 billion merger deal announced in 2008 between InBev and Anheuser-Busch.

The dividend isn’t grand compared with other spirits players at just 1.7%, and the valuation is a bit rich at a forward P/E of around 18. But cash flow is strong, and after the Modelo deal is closed, there could be a renewed effort to get cash flowing back to shareholders in the form of bigger dividends and buybacks.

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